ERISA-Second Circuit Rules That Participant Is Entitled To Recover An Amount That The Plan Erroneously Transferred Out Of His Account, Even Though the Plan Had Not Yet Recovered That Amount From The Payee

In Milgram v. Orthopedic Associates Defined Contribution Pension Plan, Nos. 10-1862-cv (L), 10-1893 (con) (2nd Cir. 2011), the plaintiff, Robert Milgram (“Milgram”), sought to recover, under section 502(a)(1) of ERISA, $763,847.93 that the defendant, the Orthopedic Associates Defined Contribution Pension Plan (“the Plan”), erroneously transferred from Milgram’s account under the Plan to his ex-wife, Norah Breen (“Breen”), under a divorce settlement, plus interest on that amount from the time of transfer.

The district court had granted Milgram judgment against the Plan for the $763,847.93 amount plus interest, and also granted the Plan an equivalent judgment against Breen. On appeal, the Plan challenged the enforceability of the judgment against it, on the ground that requiring its payment before the Plan has fully recovered from Breen would violate, among other law, ERISA’s anti-alienation provision, found in section 206(d)(1) of ERISA. After reviewing the case, the Second Circuit Court of Appeals (the “Court”), affirmed the district court’s judgments, thereby ruling against the Plan’s challenge. Morever, the Plan would have to pay the funds to Milgram, even if it could not collect any funds from Breen.

In upholding the enforceability of the judgment against the Plan, the Court noted that, under section 502(d)(1)-(2) of ERISA, an employee benefit plan may be sued, and that any resulting money judgment is enforceable against the plan. ERISA’s anti-alienation provision, found in section 206(d)(1) of ERISA, under which plan benefits may not be assigned or alienated, does not change this result. The anti-alienation provision protects participants’ benefits. However, the Court said that the undistributed assets of a plan-even a defined contribution plan as here- are not participants’ benefits and therefore do not receive anti-alienation protection. A plan is required to pay its own debts, even if the payment comes out of plan assets, and reduces participants’ accounts. The Court found the remaining arguments against the enforceability of the judgment against the Plan unpersuasive. As to the interest on the $763,847.93 principal amount, the Court said that Milgram’s right to be compensated for the time value of the misdirected funds is a question of contract interpretation, to be decided under federal common law. The Court concluded that Milgram’s entitlement to the interest is implicit in the Plan’s terms, as so interpreted.

Thought: Unless something changes, like the Plan collects from Breen or the employer makes a compensating contribution, the judgment against the Plan will be paid out of, and correspondingly reduce, other participants’ accounts in the Plan. They won’t be too happy about that.

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